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Copyright  2005 David N. Heard, Jr.,
Houston Journal of Health Law & Policy
ISSN 1534-7907
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THE SPECIALTY HOSPITAL DEBATE:
THE DIFFICULTY OF PROMOTING
FAIR COMPETITION WITHOUT
STIFLING EFFICIENCY
David N. Heard, Jr.*
I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
II. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A. The Advent of the Specialty Hospital . . . . . . . . . . . .
B. How Specialty Hospitals Differ from Their
Competitors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
III. Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A. The Recent Moratorium on Physician Investment
in Specialty Hospitals . . . . . . . . . . . . . . . . . . . . . . . . . . . .
B. How Hospitals Were Dealing with the Problem
Before the Moratorium . . . . . . . . . . . . . . . . . . . . . . . . . . .
C. Self Referral Laws and Specialty Hospitals . . . . . .
D. Why Self-Referral Alone May Not Answer Some
Problems Presented by Specialty Hospitals . . . . . .
E. Using Government Reimbursement to Affect
Hospital Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F. Why State and Local Governments May Have
More Flexibility to Address Problems Presented
by Specialty Hospitals . . . . . . . . . . . . . . . . . . . . . . . . . . .
G. Certificate of Need and Related Measures that
Can Be Used to Regulate Hospital
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
H. Are State Certificate of Need Laws the
Solution? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
I. Requiring Hospitals to Provide Community
Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
J. Imposing Taxes on Specialty Hospital
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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* Juris Doctor Candidate (2006), University of Houston Law Center. The author would like
to thank his wife Keri Tonn for her patience and support, and Professor Richard Saver for
his guidance.
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K. Going Forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IV. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
I.
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242
INTRODUCTION
The United States’ health care system attempts to balance the
policy goals of access, quality, and cost of care.1 Each of these goals
is interrelated, and an attempt to affect one component often will
come at the expense of another.2 Our system is plagued by increasing numbers of uninsured patients,3 significant problems with quality,4 and ever increasing costs of care.5 The United States’ current
health care expenditures are about the size of France’s entire economy and growing.6
While many factors contribute to rising health care costs, a significant portion is attributed to hospital services.7 Some have speculated as to why costs of hospital services continue to rise,8 but most
1
U.S. GEN. ACCT. OFFICE, HEALTH CARE: UNSUSTAINABLE TRENDS NECESSITATE COMPREHENSIVE AND FUNDAMENTAL REFORMS TO CONTROL SPENDING AND IMPROVE VALUES 3 (2004),
http://www.gao.gov/new.items/d04793sp.pdf (last visited Feb. 28, 2006) [hereinafter
GAO UNSUSTAINABLE TRENDS].
2
See, e.g. James E. Eggleston, Patient Advocacy and Consumer Protection Through Union Activism: Protecting Health Care Consumers, Patients and Workers During an Unprecedented Restructuring of the Health Care Industry, 41 ST. LOUIS U. L.J. 925, 926 (1997).
3
THE KAISER COMM’N ON MEDICAID AND THE UNINSURED, HEALTH INSURANCE COVERAGE IN
AMERICA 7 (2004), http://www.kff.org/uninsured/loader.cfm?url=/commonspot/security/getfile.cfm&PageID=46814 (last visited Feb. 28, 2006) (stating that 18% of individuals
under age sixty-five in the United States do not have health insurance).
4
See LINDA T. KOHN, ET AL., TO ERR IS HUMAN: BUILDING A SAFER HEALTH CARE SYSTEM 1
(2002) (explaining that as many as 98,000 people die each year as the result of medical
mistakes).
5
GAO UNSUSTAINABLE TRENDS, supra note 1, at 3 (explaining that health care spending represented 7% of Gross Domestic Product (GDP) during 1970 and is estimated to grow to
17% by 2010).
6
Analysis on file with author. Based on total United States GDP of approximately $11 trillion, our current health care spending represents the entire GDP of France. Compare CENTRAL INTELLIGENCE AGENCY, THE WORLD FACTBOOK (2005), http://cia.gov/cia/
publications/factbook/geos/fr.html (last visited Feb. 28, 2006) (highlighting statistical
facts about France) with CENTRAL INTELLIGENCE AGENCY, THE WORLD FACTBOOK (2005),
http://cia.gov/cia/publications/factbook/geos/us.html (last visited Feb. 28, 2006) (comparing similar statistics about the U.S.). Current estimates suggest health care spending in
the United States represents approximately 15% of GDP.
7
PAULA SPURWAY, BLUE CROSS & BLUE SHIELD ASS’N, STRAIGHT TALK NEWS LETTER: HOSPITAL SERVICES AND THE RISING COST OF HEALTH CARE (Sept. 2003), http://www.fepblue.
org/toyourhealth/tyhhchospitalcosts.hmtl (last visited Feb. 28, 2006).
8
Id. (explaining that the reasons for the rising cost of hospital services include nursing
shortages, the cost of outpatient services, hospital market consolidation, and new medical
technologies).
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critics fail to address solutions to the causes of the problems.9 Most
modern proposals suggest our health care system needs more freemarket principles to help promote competition and reduce the cost
of hospital services.10 A recent editorial in the Wall Street Journal
depicted the growth of physician-owned specialty hospitals as an
example of a free-market success story.11 While specialty hospitals
may be more financially profitable,12 it is debatable whether their
success is the result of shifting costs to competitors or if they truly
are more efficient health care providers.13 As some truth likely exists in both arguments, policy makers must consider both issues.
The overall goal needs to avoid restrictions on specialty hospital efficiency gains while promoting fair hospital market competition.
This comment considers some effects of proposals aimed at regulating physician-owned specialty hospitals. The comment will: (1)
provide background on what is a specialty hospital and how they
differ from traditional hospitals; (2) explore the events leading up to
the recent moratorium on specialty hospitals; (3) explore the application of self-referral laws to specialty hospitals; (4) consider the
role of government reimbursement for hospital services; (5) examine
the role of state and local governments in addressing problems
caused by specialty hospitals; (6) explain how certificate of need
laws have been used in the past to regulate hospital competition; (7)
consider community benefits requirements for hospital markets; (8)
consider possible taxes on specialty hospital services; and finally (9)
consider the future of specialty hospitals.
II.
BACKGROUND
A. The Advent of the Specialty Hospital
A specialty hospital is generally defined as a type of hospital
that restricts its admissions to a particular group of persons or class
9
Most efforts to control costs do not provide global solutions. See id. (suggesting one solution for consumers is to use insurance plans that contract with preferred hospitals).
10
See id.
11
See Review and Outlook in the (Specialty) Hospital, WALL ST. J., Jan. 3, 2005, at A8.
12
U.S. GEN. ACCT. OFFICE, SPECIALTY HOSPITALS: GEOGRAPHIC LOCATION, SERVICES PROVIDED,
AND FINANCIAL PERFORMANCE 5 (2003), http://www.gao.gov/new.items/d04167.pdf (last
visited Feb. 28, 2006) [hereinafter GAO SPECIALTY HOSPITALS: GEOGRAPHIC LOCATION].
13
See generally KELLY J. DEVERS ET AL., CTR. FOR STUDYING HEALTH SYS. CHANGE, SPECIALTY
HOSPITALS: FOCUSED FACTORIES OR CREAM SKIMMERS (2003), http://www.hschange.com/
CONTENT/552/552.pdf (last visited Feb. 28, 2006).
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of services.14 Under this definition, a wide range of hospitals may
be considered specialty hospitals, including children’s15 and women’s hospitals. The controversy over specialty hospitals has been
related to more recent development in specialty hospitals.16 The
General Accounting Office (GAO) identifies this “new” type of specialty hospital as a narrower group of hospitals that focuses on specific treatments such as cardiac, orthopedic, surgical, and women’s
services.17 For purposes of this comment, the author’s discussion of
specialty hospitals is based on the GAO definition. While these specialty hospitals represent a small fraction of the total hospital industry in the United States,18 the issues presented represent some core
issues of the modern health care policy debate.
Recently, specialty hospitals have expanded rapidly, pushing
this new form of specialty hospital to the forefront.19 One of the
more controversial aspects of this new breed of hospital is that the
majority of specialty hospitals involve some degree of physician
ownership.20 According to the GAO, physicians own approximately
70% of existing specialty hospitals.21 In response to concerns over
the growth of specialty hospitals, Congress placed a temporary ban
on future growth of physician-owned specialty hospitals.22 Although the moratorium is no longer in place, public policymakers
14
See U.S. GEN. ACCT. OFFICE, SPECIALTY HOSPITALS: INFORMATION ON NATIONAL MARKET
SHARE, PHYSICIAN OWNERSHIP, AND PATIENTS SERVED 1 (Apr. 2003), http://www.gao.
gov//new.items/d03683r.pdf#search=’gao%20and%20specialty%20hospital (last visited
Feb. 28, 2006) [hereinafter GAO SPECIALTY HOSPITAL NATIONAL MARKET SHARE].
15
Id.
16
Id. at 1–2.
17
GAO Specialty Hospital National Market Share, supra note 14, at 2–3.
18
Id. at 3. The GAO definition is a more limited classification of specialty hospitals based on
analysis of past Medicare hospital reimbursement. Id. The GAO defines specialty hospitals
as hospitals that have greater than two-thirds of patients’ treatments based on specific
illnesses or surgical procedures. Id. The definition also excludes long-term care hospitals.
Id.
19
GAO SPECIALTY HOSPITAL NATIONAL MARKET SHARE, supra note 14, at 3.
20
Id. at 2.
21
Id. at 4.
22
Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. 108173, § 507, 117 Stat. 2295–97 (2003), § 507. The ban was limited to an eighteen month
period that ended June 8, 2005. Id. During this period, physicians could not invest in new
cardiac, orthopedic, and surgical specialty hospitals not already under construction; see
GAO SPECIALTY HOSPITAL NATIONAL MARKET SHARE, supra note 14, at 3. The ban applies
to physician investments in GAO-defined specialty hospitals. Id.
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continue to struggle with how to address problems surrounding
specialty hospitals.23
B. How Specialty Hospitals Differ from Their Competitors
One of the issues in the specialty hospital debate is what effect
physician-owned specialty hospitals have on local full service community hospitals.24 Because federal legislation does not precisely
define full service community hospitals, the author assumes all nonspecialty hospitals are included in this definition. The moratorium
focuses on the specific harms physician-owned specialty hospitals
cause their competitors.25 But this limited focus fails to address
some of the major distinguishing factors between specialty hospitals
and non-specialty hospitals. According to the GAO, approximately
80% of all non-specialty hospitals operate with public or private notfor-profit status.26 By comparison, 70% of both physician and nonphysician-owned specialty hospitals operate as for-profit entities.27
As a result, the vast majority of specialty hospitals are not required
to provide the community benefits that are required for not-forprofits to retain federal tax exempt status.28 Beyond the effects of
physician ownership, most of the other differences between specialty and non-specialty hospitals stem from the fact that specialty
hospitals are less likely to provide the community benefits required
of not-for-profit hospitals.29 Some of the community benefits generally required of not-for-profits include operating a twenty-four hour
emergency room, providing charity care, and participating in Medicare and Medicaid programs.30
23
The moratorium on specialty hospitals ended in June, but the Centers for Medicare and
Medicaid Services are not processing new applications for participation in government
reimbursement programs. HEALTHCARE FIN. MGMT. ASS’N, HFMA POLICY WATCH—AUGUST 2005: MORATORIUM ENDS, BUT CMS KEEPS SPECIALTY HOSPITALS ON HOLD, http://
www.hfma.org/publications/HFM_Magazine/updata.htm [hereinafter HFMA POLICY
WATCH] (last visited Feb. 28, 2006).
24
See id.
25
Id.
26
GAO SPECIALTY HOSPITALS: GEOGRAPHIC LOCATION, supra note 12. Statistics were not
available to determine the exact number of physician-owned specialty hospitals. The difficulty in determining physician ownership is that the hospital ownership can be placed in a
family member’s name.
27
Id.
28
See Rev. Rul. 69-545, 1969-2 C.B. 117.
29
GAO SPECIALTY HOSPITALS: GEOGRAPHIC LOCATION, supra note 12.
30
Rev. Rul. 69-545, supra note 28.
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Specialty hospitals are less likely to have an emergency room
or offer twenty-four hour emergency care.31 Operating an emergency department can expose hospitals to tremendous financial liability through federal EMTALA laws.32 Overall, emergency services
can be one of the more cost intensive areas of a hospital from a direct financial as well as from a potential medical liability
standpoint.33
Regardless of the costs of these services, most hospitals simply
do not offer community benefits unless required.34 Many of the
purported differences between specialty and non-specialty hospitals
parallel the general differences in most not-for-profit hospitals and
their for-profit competitors.35 It is undisputed that the costs of community benefits are significant, but whether these services should be
required of all hospitals is part of a larger debate. The equity of
federal tax exemption laws and how they affect hospital competition is beyond the scope of this comment, but some of the effects of
specialty hospitals’ failure to provide community benefits are discussed below.
Although specialty hospitals may not be burdened with many
of the costs of non-specialty hospitals, the real fight is over revenue.36 Most general acute care hospitals serve a wider range of patients than the limited niche served by specialty hospitals.37 For
patient services provided, hospitals receive revenue from a select
number of payers, including government and private payers.38
Most specialty hospitals have limited their focus to more profitable
service lines.39 Analysts acknowledge that specialty hospitals are
likely to siphon future patient revenue away from the non-specialty
hospitals in their market. As a result, non-specialty hospitals are
31
GAO SPECIALTY HOSPITALS: GEOGRAPHIC LOCATION, supra note 12 at 4, 19–20. Fewer than
half of specialty hospitals surveyed had twenty-four hour emergency departments. Id.
32
See Burditt v. U.S. Dep’t of Health & Human Servs., 934 F.2d 1362, 1366–70 (5th Cir. 1991).
EMTALA requires hospitals to provide stabilizing treatments to persons with emergent
conditions or in active labor regardless of their ability to pay. See id. at 1371. EMTALA
violations can result in fines and private causes of action against hospitals. See id.
33
See e.g. SPURWAY, supra note 7.
34
See TEX. HEALTH & SAFETY CODE ANN. § 311.046 (Vernon 2001); see generally GAO SPECIALTY HOSPITALS: GEOGRAPHIC LOCATION, supra note 12, at 4.
35
Michael I. Sanders, Health Care Joint Ventures Between Tax-Exempt Organizations and ForProfit Entities, 15 HEALTH MATRIX 83, 84 (2005).
36
See generally DEVERS
37
Id.
38
See id.
39
See also GAO SPECIALTY HOSPITALS: GEOGRAPHIC LOCATION, supra note 12, at 22–23.
ET AL.,
supra note 13.
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likely to suffer from the loss of revenue.40 The harm caused by revenue loss is likely to have a compounding effect because most nonspecialty hospitals rely on profitable service lines to “cross-subsidize” unprofitable services and uncompensated care.41
One example of how specialty hospitals focus on more profitable service lines is that they are less likely to rely on Medicaid revenue.42 This may be explained in part by the fact that specialty
hospitals are less likely to provide extensive emergency and trauma
care services.43 Although the exact reasons remain unclear, experts
should acknowledge that state Medicaid programs often reimburse
hospitals at or below the hospitals’ costs for patient treatment.44
Some evidence also exists that specialty hospitals have a tendency to
treat patients with less serious illnesses.45 These phenomena may be
the result of physicians cherry-picking the best patients and sending
them to specialty hospitals where these physicians have an ownership interest.46
Proponents of specialty hospitals claim that they are more efficient than traditional general hospitals.47 The efficiency arguments
have some credence. For example, from an intuitive perspective,
the specialization of labor generally allows for gains in efficiency.48
Most specialty hospitals are organized to provide services along the
same lines as doctors’ specialties.49 Specialty hospitals can design
their facilities and processes to allow for the efficient use of time and
40
DEVERS
41
Id.
42
GAO SPECIALTY HOSPITALS: GEOGRAPHIC LOCATION, supra note 12, at 21, fig. 5. Specialty
hospitals do appear, however, to treat a similar number of Medicare patients as non-specialty hospitals. Id.
43
Id. at 4.
44
See generally 1 TEX. ADMIN. CODE, § 355.8061 (2005). Medicaid reimbursement for outpatient hospital services range from 80.3% to 84.48% of allowable costs. Id. Additional reimbursement may include Medicaid Disproportionate Share payments. See id.
45
See GAO SPECIALTY HOSPITALS: GEOGRAPHIC LOCATION, supra note 12, at 7–8. Under Medicare hospital reimbursement, hospitals are paid a fixed amount based on the patient’s
diagnosis related group. Id. A hospital would theoretically receive the same reimbursement for a patient with the same condition regardless of the severity of the illness. Id.
46
See Angela Gonzales, Federal Moratorium Derails Plans for Specialty Hospital, PHOENIX BUS. J.,
Feb. 6, 2004, http://phoenix.bizjournals.com/phoenix/stories/2004/02/09/story1.html
(last visited Feb. 28, 2006).
47
See Review and Outlook in the (Specialty) Hospital, supra note 11.
48
See generally GAO SPECIALTY HOSPITALS: GEOGRAPHIC LOCATION, supra note 12, at 23–24.
49
See id, supra note 22, at 2. Specialty hospitals are generally organized based on cardiac,
orthopedic, or surgical services which correspond directly to individual physician practice
specialties.
ET AL.,
supra note 13.
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resources. As a result, physicians may be able to work more efficiently in their day to day functions. Some of these efficiencies may
exist because physicians are given greater authority in hospital
management.50 Others point to the fact that specialization allows
specialty hospitals to manage hospital resources more effectively.51
For example, specialty hospital purchasing departments can
purchase more effectively because unlike non-specialty hospitals
with broader missions, they do not have to prepare for the myriad
of contingencies. If specialty hospitals are truly more efficient than
their competitors, then the result may ultimately lead to lower costs
in health care services through competition. Regardless of the reasons, specialty hospitals are more profitable than non-specialty hospitals, as non-specialty hospitals have had lower total profit margins
than for-profit specialty hospitals.52
Questions have also been raised about the effects specialty hospitals have on quality of care.53 Some critics have suggested that
specialty hospitals may present safety concerns.54 Most concerns
stem from the fact that specialty hospitals are less likely to have onsite emergency departments.55 On the other hand, specialty hospital
proponents claim these hospitals are able to provide higher quality
care.56 To assist in sorting out these concerns, the moratorium legislation also required studies of specialty hospital safety and quality
concerns.57
III.
DISCUSSION
AND
ANALYSIS
Many of the questions raised by physician-owned specialty
hospitals should cause us to reconsider the measures we use to regulate hospital competition. Attempts at increasing hospital compe50
DEVERS
51
See Review and Outlook in the (Specialty) Hospital, supra note 11.
52
GAO SPECIALTY HOSPITALS: GEOGRAPHIC LOCATION, supra note 12, at 25–26. During 2001,
not-for-profit general hospitals had a 3.1% total facility margin in comparison to a 9.7%
total facility margin for for-profit specialty hospitals. Id. During the same period, not-forprofit Medicare inpatient margins were 8.9% compared to 9.4% for specialty hospitals. Id.
53
CINDY BORGMEYER, AM. ACADEMY OF FAM. PHYSICIANS, SPECIALTY HOSPITAL ISSUE COMES
TO CAPITOL HILL—MEDPAC, CMS STUDIES RAISE MORE QUESTION AND OFFER FEW ANSWERS, Apr. 4, 2005, http://www.aafp.org/x33692.xml (last visited Feb. 28, 2006).
54
See Gonzales, supra note 46.
55
See GAO SPECIALTY HOSPITALS: GEOGRAPHIC LOCATION, supra note 12, at 17–19.
56
See Review and Outlook in the (Specialty) Hospital, supra note 11.
57
See Medicare Prescription Drug, Improvement, and Modernization Act of 2003, supra note
22.
ET AL.,
supra note 13.
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tition may have long-lasting harmful effects, while other attempts to
create fair competition may not go far enough. Although many suggest we need to introduce more competition in the hospital market,
most fail to recognize the complexity of the existing web of health
care regulations. Finding the appropriate balance is often difficult,
and regulations may need to be altered over time as the market adjusts. The current dilemma over specialty hospitals reflects many of
these challenges. The challenge to policymakers is to find a way to
encourage competition, while also ensuring that regulatory gaps are
not unfairly exploited.58
A. The Recent Moratorium on Physician Investment in
Specialty Hospitals
Many of the differences between specialty and non-specialty
hospitals point to the core issue of whether physician-owned specialty hospitals have an unfair advantage, or whether they promote
much needed efficiencies in the hospital market.59 Congress recently refused to extend an existing moratorium on physician investment in specialty hospitals.60 The Medicare Modernization Act
provided for an eighteen-month moratorium on physician ownership in “specialty” hospitals.61 The Act’s moratorium prevented
physician-owned specialty hospitals, not in existence prior to Nov.
10, 2003, from receiving Medicare funds.62 Other provisions of the
Act required government agencies to produce studies examining the
effects physician-owned specialty hospitals have on their competitors, how utilization patterns differ, and how their cost structures
differ from other hospitals.63 Although the moratorium provided
for a complete ban on physician investment in specialty hospitals,64
some commentators and a GAO report suggest that the spread of
58
DEVERS
59
See id.
60
See HFMA POLICY WATCH, supra note 23.
61
See Medicare Prescription Drug, Improvement, and Modernization Act of 2003, supra note
22.
62
Id. (The moratorium went into effect during March 2004.).
63
Id. (The studies will consider specialty hospitals’ effect on community hospitals.). The
Act also requires separate studies related to specialty hospital utilization and Medicare
reimbursement. The moratorium expired June 8, 2005.
64
Id. The moratorium removes a previous exception to Medicare self referral laws regarding
physician ownership of entire hospitals.
ET AL.,
supra note 13, at 4.
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specialty hospitals may be more prevalent in states without certificate of need laws.65
B. How Hospitals Were Dealing with the Problem Before the
Moratorium
Prior to the moratorium’s ban on physician investment in specialty hospitals, some non-specialty hospitals had already taken preventative measures.66 Many hospitals went to great lengths to
prevent or mitigate the effects specialty hospitals had in their communities.67 Some started extensive media campaigns promoting the
merits of the existing hospital’s services in preparation for future
specialty hospital competition.68 Other hospitals even began to look
like specialty hospitals by changing their names and specializing in
the types of services offered.69
Hospitals may be hesitant to take a direct stand against physician investment in specialty hospitals because they do not want to
jeopardize relationships with physicians in their community. As a
result, many hospitals have used trade groups to voice their opposition to physicians investing in specialty hospitals.70 Some hospitals
have implemented more controversial methods, such as revoking
hospital privileges for physicians who invest in specialty hospitals.71
Revoking a physician’s admitting privileges to a hospital can significantly deter potential physician owners.72 A physician faces a significant financial risk if he or she is stripped of the ability to refer
patients to a hospital. The controversial use of evaluating physi-
65
DEVERS ET AL., supra note 13; see GAO SPECIALTY HOSPITALS: GEOGRAPHIC LOCATION, supra
note 12, at 15.
66
See id.
67
See Beth Aaron, Lubbock Heart Hospital Opens Despite Concerns, DAILY TOREADOR, Feb. 26,
2004, http://www.dailytoreador.com/media/paper870/news/2004/02/26/LocalNews/
Lubbock.Heart.Hospital.Opens.Despite.Concerns1278247.shtml?norewrite&sourcedomain
=www.dailytoreador.com (last visited Feb. 28, 2006).
68
See id.
69
See DEVERS
70
See AHA Assesses Specialty Hospital Impact, 58 HEALTHCARE FIN. MGMT. 26 (Dec. 1, 2004).
71
DEVERS
72
FTC/DOJ Hearings on Health Care and Competition Law and Policy, (Mar. 27, 2003) (statement
of Dennis I. Kelly, Executive President of Dev. and Gov’t Relations for MedCath Corps.),
available at http://www.ftc.gov/ogc/healthcarehearings/doc/030327denniskelly.pdf (last
visited Feb. 28, 2006).
ET AL.,
ET AL.,
supra note 13.
supra note 13, at 4.
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cians based on financial performance is known as economic
credentialing.73
Another option hospitals have used to prevent physician defection to specialty hospitals involves partnering with physicians in
a new specialty hospital of their own.74 Competing hospitals have
offered a joint venture option to physicians to prevent other hospitals from entering their hospital market.75 The option for hospitals
to joint venture with physicians was also subject to the moratorium’s ban.76
C. Self Referral Laws and Specialty Hospitals
In most business settings, an ownership interest or participation in profits may help align the goals of company representatives
and employees with the goals of the organization.77 While physician ownership may provide an effective incentive to benefit the individual organization, questions remain as to whether these
incentives provide positive effects on a hospital market. Specialty
hospital proponents claim that they are able to operate more efficiently than other hospitals.78 Their competitors dispute the claims
of efficiency and argue that physician-owners have unfair advantages because they control patient referrals.79
The idea of restricting physician referrals for health care services is not a novel concept. The federal Anti-Kickback statute has
long prevented any remuneration in exchange for governmentfunded business.80 The Anti-Kickback statute also prevents any remuneration in exchange for the referral of patients covered under a
federal health care program such as Medicare or Medicaid.81 Prohibited referrals were eventually expanded to include so called phy73
See AM. COLLEGE OF MED. QUALITY, POLICY 23: ECONOMIC CREDENTIALING, http://www.
acmq.org/policies/policy23.htm (last visited Feb. 28, 2006). Economic credentialing is the
use of financial information to evaluate physician performance. Historically, most physicians have been reviewed based upon quality measures.
74
DEVERS
75
See id.
76
See Medicare Prescription Drug, Improvement, and Modernization Act of 2003, supra note
22.
77
See Richard S. Saver, Squandering the Gain: Gainsharing and the Continuing Dilemma of Physician Financial Incentives, 98 NW. U. L. REV. 145, 148 (2003).
78
See generally DEVERS
79
Id.
80
See 42 U.S.C. §§ 1320a-7b (2004).
81
Id.
ET AL.,
supra note 13, at 2–3.
ET AL.,
supra note 13, at 3.
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sician “self-referrals” under the Stark law.82 The Stark law was
implemented in response to studies that showed higher utilization
of some Medicare services occurred when physicians referred patients to facilities in which they had a financial relationship.83 When
the Stark law was created, this type of physician self-referral behavior was not subject to Anti-Kickback statute prohibitions.84 Since its
original passage, the scope of the Stark law has been expanded to
include a wide range of designated health services such as ownership of outpatient labs, radiology, and dialysis centers, etc.85
Although the current Stark laws prevent physicians from referring patients to a health care facility if a financial relationship exists,
the law includes numerous exceptions.86 Prior to the moratorium,
one exception allowed physician investment in “whole” hospitals,
but not individual hospital departments.87 The recent moratorium
temporarily removed the ownership of specialty hospitals from the
Stark law’s whole hospital exception.88
Self-referral laws could technically be applied to almost every
aspect of a physician’s business if all of the current exceptions to the
Stark law were removed.89 In the past, the federal government applied self-referral laws to areas where some evidence of abuse existed.90 The recent moratorium on specialty hospitals requires a
82
See Joan H. Krause, Regulating, Guiding, and Enforcing Health Care Fraud, 60 N.Y.U. ANN.
SURV. AM. L. 241, 250–51 (2004). The limitation is restricted to government-funded programs such as Medicare and Medicaid. Id. The Stark law is named after California Congressman Fortney “Pete” Stark who authored the original bill that first came into effect
during 1989. See 101 Pub. L. No. 239, § 6204, 103 Stat. 2106 (1989) (codified at 42 U.S.C.
§ 1395nn (2004).
83
See id.
84
42 U.S.C. § 1395nn (2004). The law’s prohibition is limited to referrals related to the federal Medicare program. Because of the tremendous role of the Medicare program in
health care revenue, the prohibition effectively bans the practice for all health care facilities. See TEXAS ACUTE CARE HOSPITAL FACT SHEET, http://www.dshs.state.tx.us/chs/
hosp/fact2003.pdf (last visited Feb. 28, 2006). For example, Medicare accounted for 40% of
billed acute care Texas hospital charges during 2003. Id.
85
42 U.S.C. § 1395nn(h)(10) (2004).
86
See 42 U.S.C. § 1395nn (2004). For example, physicians can refer patients to ambulatory
surgery centers (ASCs). 42 U.S.C.A. § 1395nn (West 2004) (citing the Notes of Decision, 5,
U.S. ex rel. Barrett v. Columbia/Healthcare Corp., 251 F. Supp. 2d 28 (2003)).
87
Id. § 1395nn(d)(3)(c).
88
Medicare Prescription Drug, Improvement, and Modernization Act of 2003, supra note 22.
89
This is because the majority of physicians have some ownership interest in their practices.
See 42 U.S.C. § 1395nn.
90
See Pat Miller, Recent Development in the Stark and Anti-Kickback Statutes, 48 MAY ADVOCATE
(IDAHO) 14 (2005).
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study of utilization trends of physician referrals to specialty hospitals where they have an ownership interest.91
D. Why Self-Referral Alone May Not Answer Some Problems
Presented by Specialty Hospitals
The current ban relies on the use of federal physician self-referral laws related to government health care programs. As mentioned
above, self-referral laws have continuously grown in scope since
they were first implemented.92 The effectiveness of self-referral
laws is also a serious question considering the inherent nature of
physician self-referral.93 If the ban on physician investment in specialty hospitals is extended, some of the questions raised by the debate will not be resolved. The self-referral laws will continue to
allow numerous exceptions that would most likely allow similar
conduct on a smaller scale.94 Banning future physician investment
in specialty hospitals will also fail to address effects of physicianowned specialty hospitals that already exist. The moratorium permitted existing physician owned specialty hospitals to continue to
operate, but limited their expansion.95
Another problem with the current federal ban on all future
physician-owned specialty hospitals is that it may be overly restrictive.96 Although physician ownership may cause conflicts of interest at some levels, a relatively small percentage of physician
ownership seems unlikely to have a significant influence on where a
physician refers patients.97 A less severe solution may be to restrict
physician ownership over some percentage threshold. Determining
what threshold is appropriate would present significant challenges
to determine what level of physician ownership presents problems.
Also, establishing a percentage threshold may only have a limited
effect considering the relatively small levels of physician ownership
91
Medicare Prescription Drug, Improvement, and Modernization Act of 2003, supra note 22,
at § 507(b)(2).
92
See AHA Assesses Specialty Hospital Impact, supra note 70.
93
See generally DEVERS ET AL., supra note 13 (the extensive list of exceptions illustrates the
inherent nature of physician self-referral).
94
See 42 U.S.C. § 1395nn.
95
Medicare Prescription Drug, Improvement, and Modernization Act of 2003, supra note 22,
at § 507(a)(1)(B)(B).
96
See generally David Shactman, Specialty Hospitals, Ambulatory Surgery Centers, and General
Hospitals: Charting a Wise Public Policy Course, HEALTH AFF., May–June 2005, at 868, 871.
97
See generally GAO SPECIALTY HOSPITALS: GEOGRAPHIC LOCATION, supra note 12, at 27 (stating that MedCath officials find that specialty hospitals are no cause for concern and that
their business profits are similar to profits earned by for-profit general hospitals).
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in current facilities.98 Although specialty hospitals are generally
physician-owned, most are comprised of both physician and nonphysician investors.99 Over half of all physicians investing in specialty hospitals had ownership shares of less than 2%.100 In instances, however, physician ownership is much more concentrated
as single physician groups own the majority interest in some
hospitals.101
Some valid reasons do exist to restrict all levels of physician
ownership in specialty hospitals. For example, allowing a physician
to invest in a hospital with little or no risk is essentially the same as
a direct payment to a physician to encourage referrals to a certain
facility. One of the problems with the similarity of these two behaviors is that payment of any remuneration to a physician in exchange
for Medicare referrals is a violation of the Anti-Kickback statute.102
If physician ownership in specialty hospitals is allowed, similar referral behavior would exist that does not violate Anti-Kickback
regulations.103
Some may question why other existing hospitals do not simply
offer physicians ownership in their hospitals. The answer is that
they do.104 As mentioned above, this is one of the tactics existing
hospitals use to compete with physician-owned specialty hospitals.105 This is problematic because it is harder for an existing hospital to sell an interest in its existing hospital.106 Most existing
hospitals are larger than their specialty counterparts.107 As a result,
offering a physician an ownership percentage in an existing facility
would be less likely to induce physician referrals because their ef98
See GAO SPECIALTY HOSPITALS: GEOGRAPHIC LOCATION, supra note 12, at 8–9. “The majority of physicians who worked in specialty hospitals had no ownership interest in the facilities.” Id. For half of physicians with an ownership interest, the ownership interest
comprised less than 2% of the respective specialty hospitals. GAO SPECIALTY HOSPITAL
NATIONAL MARKET SHARE, supra note 14, at 10.
99
GAO SPECIALTY HOSPITAL NATIONAL MARKET SHARE, supra note 14, at 14.
100
Id.
101
Id.
102
See 42 U.S.C.A § 1320a-7b (West 2004).
103
This is because allowing a physician to refer a patient to their own hospital would allow a
physician to grant a pecuniary benefit to his or herself through a referral.
104
GAO SPECIALTY HOSPITALS: GEOGRAPHIC LOCATION, supra note 12, at 9.
105
See supra Section III.B.
106
GAO SPECIALTY HOSPITALS: GEOGRAPHIC LOCATION, supra note 12, at 7.
107
GAO SPECIALTY HOSPITAL NATIONAL MARKET SHARE, supra note 14, at 7.
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forts would be diluted by the hospital’s other businesses.108 Further,
most existing traditional hospitals are not nearly as profitable as
specialty hospitals.109 It is unlikely that a physician or other investors would want to invest in an unprofitable hospital.
Existing self-referral laws also prevent hospitals from offering
a physician an ownership interest in a subdivision of a hospital.110
These regulations keep existing hospitals from carving out a division of a hospital and offering it to physicians to encourage them to
refer patients or order services in a particular hospital subdivision.111 It is likely that this regulatory prohibition of self-referrals
has been a contributing factor in the increase in smaller specialty
hospitals. Instead of purchasing a hospital subdivision, specialty
hospitals essentially operate as a freestanding subdivision of a
whole hospital.
Offering physicians ownership in existing hospitals also triggers not-for-profit tax exemption issues.112 The majority of hospitals
in the United States are not-for-profit facilities.113 Of these not-forprofit hospitals, some are owned by state and local government, and
some are private not-for-profits operated by religious or other charitable organizations.114 Not-for-profit hospitals are more restricted in
their ability to offer physician ownership in their existing facilities.115 Not-for-profits encounter problems because they must provide benefits to the public and not private persons or investors.116
Some private not-for-profits have been able to skirt these requirements by joint venturing with physicians in new specialty hospi108
Gil Bachman, Financial Impact of Physician Ownership in Specialized Healthcare Centers, 28
WYO. LAW. 36, 38 (2005).
109
See MEDICARE PAYMENT ADVISORY COMM’N (MEDPAC), REPORT TO THE CONGRESS: PHYSICIAN-OWNED SPECIALTY HOSPITALS (Mar. 2005), available at http://www.medpac.gov/publications/congressional_reports/mar05.spechospitals.pdf (last visited Feb. 28, 2006);
LAURA A. DUMMIT, NAT’L HEALTH POL’Y FORUM, SPECIALTY HOSPITALS: CAN GENERAL
HOSPITALS COMPETE? (Jul. 13, 2005), available at http://www.nhpf.org/pdfs_ib/IB804_Sp
Hospitals_07-13-05.pdf (last visited Feb. 28, 2006).
110
See 42 U.S.C. § 1395nn (2004).
111
Id.
112
See Rev. Rul. 56-185 (a not-for-profit hospital cannot operate for the benefit of private
individuals or restrict access to a particular group of physicians).
113
See GAO SPECIALTY HOSPITALS: GEOGRAPHIC LOCATION, supra note 12 at 8.
114
See generally AM. HOSPITAL ASS’N (AHA), FAST FACTS ON U.S. HOSPITALS FROM AHA HOSPITAL STATISTICS, http://www.aha.org/aha/resource_center/fastfacts/fast_facts_US_hospitals.html (last visited Feb. 28, 2006).
115
See generally Rev. Ruling 69-545; Rev Ruling 56-185.
116
See Rev. Rul. 69-545 at 4–5 (stating that a “hospital may not be operated, directly or indirectly, for the benefit of private interests”).
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tals.117 However, public or government operated not-for-profits
generally lack the flexibility to joint venture with physician owners.118 Another problem with offering physicians ownership in a
hospital is that it will inevitably reduce the overall revenue share for
an existing hospital. Some hospitals have nevertheless taken the
joint venturing approach as the lesser of two evils, sharing revenue
with physicians compared to losing all of it.119
E. Using Government Reimbursement to Affect Hospital
Competition
One question raised by the moratorium is whether any additional efforts to address specialty hospitals should come from the
federal or state level. Although the moratorium’s ban on physician
investment in specialty hospitals ended on June 8, 2005120, the question remains what, if any, additional measures may be required. As
discussed above, the recent ban was limited to participants in the
federal Medicare program.121 Even though the ban is technically
limited in its application to hospitals receiving Medicare, in reality
no hospital system can operate without relying on Medicare reimbursement to some degree.122 This is why the federal government
establishes its authority to set health policy through the Medicare
and Medicaid programs instead of Congress’ Commerce Clause
powers.123
The statute, MMA 2003, containing the moratorium also indicated that Medicare hospital reimbursement may be altered to account for differences in physician-owned specialty hospitals.124
Altering federal and state Medicare and Medicaid hospital reim117
Michael I. Sanders, Healthcare Joint Ventures Between Tax-Exempt Organizations and ForProfit Entities, 15 HEALTH MATRIX 83, 85 (2005).
118
See generally Rev. Rul. 69-545 at 4–5.
119
Roger D. Strode, Hospital-physician Joint Ventures Threat or Opportunity?, HEALTHCARE FIN.
MGMT. (Jul. 2004).
120
See Medicare Prescription Drug, Modernization, and Improvement Act of 2003, supra note
22.
121
Id.
122
See DEVERS
123
See David B. Kopel & Glenn H. Reynolds, Taking Federalism Seriously: Lopez and the Partial
Birth Abortion Ban Act, 30 CONN. L. REV. 59 (1997) (Congress’s use of the Commerce Clause
to enforce the Partial Birth Abortion Act is a unique use of federal power).
124
Medicare Prescription Drug, Improvement, and Modernization Act of 2003, supra note 22
(requiring Medicare Payment Advisory Commission (MedPAC) to study any differences
in the costs of patient care between physician-owned specialty hospitals and their competitors). Id.
ET AL.,
supra note 13.
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bursement may be necessary because reimbursement issues may
contribute to specialty hospitals’ success and accompanying
problems.
Most of the problems result from the fact that Medicaid and
Medicare hospital reimbursement payments are generally less than
hospitals receive from private or commercial sources.125 As mentioned above, specialty hospitals have a tendency to treat greater
numbers of patients that provide favorable reimbursement.126 As a
result, Medicare and Medicaid hospital reimbursement compounds
the effect of non-specialty hospitals’ loss of patients by providing
specialty hospitals the incentive to treat less sick patients. Furthermore, because Medicare (hospital) reimbursement is evaluated on a
retrospective basis, differences in cost structures for specialty hospitals are less likely to be considered in establishing hospital reimbursement until several years after the payment has occurred.127
Because the adequacy of Medicare reimbursement is evaluated after
payment is received, inequities in reimbursement cannot be corrected until months or years after they are discovered.
F. Why State and Local Governments May Have More
Flexibility to Address Problems Presented by
Specialty Hospitals
Beyond other changes from the federal government, a number
of options have been suggested that may be implemented at the
state or local level.128 State and local governments have the unique
power to address problems specific to their communities. Although
they may be in the best position to offer solutions to the specialty
hospital problem,129 state and local authorities lack the resources
necessary to affect local hospital market conditions.130
125
See Tammy Lundstrom, Under Reimbursement of Medicaid and Medicare Hospitalizations as an
Unconstitutional Taking of Hospital Services, 50 WAYNE L. REV. 1243, 1251 (2005).
126
MEDPAC, REPORT
127
See CTRS. FOR MEDICARE & MEDICAID SERVS., HOSPITAL INFORMATION RESOURCE FOR MEDICARE, http://www.cms.hhs.gov/providers/hospital.asp (last visited Feb. 28, 2006).
128
Rebecca Bethard, Note, Physician Self-Referral: Beyond Stark II, 43 BRANDEIS L.J. 465, 474–75
(2005).
129
See id. at 473–74.
130
NICHOLAS JOHNSON & BOB ZAHRADNIK, CTR. ON BUDGET AND POL’Y PRIORITIES, STATE
BUDGET DEFICITS PROJECTED FOR FISCAL YEAR 2005, at 3 (2004), http://www.cbpp.org/1022-03sfp2.pdf (last visited Feb. 28, 2006) .
TO THE
CONGRESS, supra note 109.
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One reason for the current balance of power is related to the
federal government’s increasing role in the health care market.131
Since the birth of Medicare and Medicaid, the federal government
has been the primary source of United States health care policy.132
This shift of power from the local to federal government may have
presented many of the problems in our health care market. Geographic proximity is a likely determinant of where patients receive
hospital services.133 As a result, most hospital markets are defined
in terms of geography.134 Because of the local nature of hospital
markets, it makes sense to place control of the health care market at
the local level.
State and local governments can still affect health care policy in
some capacity. This is reflected in states’ ability to direct some
Medicaid and Children’s Health Insurance Program (CHIP) funding, but the majority of Medicare policy rests entirely with the federal government.135 Nevertheless, states have the power to regulate
hospital markets.136 Some states have statutes banning self-referral
activity by physicians in a wide range of circumstances.137 Commentators have claimed that state self-referral laws have prevented
the spread of specialty hospitals in these states.138 Certain states also
require physicians to disclose financial incentives to patients.139 Disclosure is a related measure that may also have some effect on consumers’ utilization of specialty hospitals. Some states require
physicians to disclose any financial incentives they receive from
treatment relationships.140
131
See Bethard, supra note 128, at 466.
132
See id.
133
This factor is probably less likely for specialized hospital care. See Greg Scandlen, Reply:
MSAS Can be a Windfall for the Rest of the US, too, 49 CATH U. L. REV. 679, 686 (2000).
134
See Robyn Whipple Diaz, Unequal Access: The Crisis of Health Care Inequality for Low-Income
African-American Residents of the District of Columbia, 7 J. HEALTH CARE L. & POL’Y 120, 122
(2004).
135
See Dayna Bowen Matthew, The “New Federalism” Approach to Medicaid: Empirical Evidence
that Ceding Inherently Federal Authority to States Harms Public Health, 90 KY. L.J. 973, 973–74
(2001).
136
See Amy Gremminger White, Comment, Paying for Patients: Choice of Law, Conflicts of Interests and Evolving Standards of Health Care Remuneration, 39 TEX. INT’L L.J. 327, 329 (2004).
137
Maureen Kwiecinski, Comment, Limiting Conflicts of Interest Arising from Physician Investment in Specialty Hospitals, 88 MARQ. L. REV. 413, 430–31 (2004).
138
See id at 425–26.
139
Id. at 430–31.
140
Id.
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One may ask why hospitals do not simply hire their physicians
and provide traditional incentives for employee behavior. These
measures are generally prohibited in most states through reliance
on the corporate practice of medicine doctrine.141 The corporate
practice of medicine doctrine places protections on the doctor-patient relationship and prevents hospitals from directly employing
physicians.142 This doctrine emerged from ethical concerns that
physicians’ loyalty to their patients would be compromised if physicians were employed by non-physicians.143 One commentator has
suggested that policymakers’ failure to address the corporate practice of medicine has caused some of the fundamental problems in
our health care market.144 Many of the significant problems in our
current health care system are related to the ineffectiveness of traditional market forces to control demand for health care and hospital
services.145 As the specialty hospital dilemma illustrates, physicians
hold the power to limit demand for hospital and other health care
services.146 The effect of the corporate practice of medicine has been
to create a virtual monopoly for licensed physicians.147 The corporate practice of medicine has been weakened or eliminated in a
number of states, but it still exists in some shape or form in most
states.148
Although this doctrine still significantly affects our ability to
introduce competition into our health care system149, any benefits
are likely to be long term in nature. As a result, banning the corporate practice of medicine doctrine is unlikely to have any immediate
effects on the issues presented by specialty hospitals.
141
See, e.g., Nicole Huberfeld, Be Not Afraid of Change: Time to Eliminate the Corporate Practice of
Medicine Doctrine, 14 HEALTH MATRIX 243 (2004) (laws that prohibit physician employment
by hospitals helped establish the form of our current health care system and exacerbate
some of the current problems related to costs and quality).
142
See id. at 251–52.
143
See id. at 248.
144
See id. at 276.
145
See, e.g., John C. Render, Recognition of Health Care Market Anomalies: Comments on a Paper
by Professor James Blumsteins, 31 IND. L. REV. 119, 121–23 (1998).
146
See id. at 121.
147
See Huberfield, supra note 141, at 249.
148
See id. at 252–53.
149
See id. at 276.
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G. Certificate of Need and Related Measures that Can Be Used
to Regulate Hospital Competition
Beyond creating self-referral laws or other long-term solutions,
states can advance additional measures to ensure fair competition
among specialty and non-specialty hospitals. Some possible options
include: 1) establishing CON laws to evaluate proposed specialty
hospitals on a case-by-case basis; 2) requiring future specialty hospitals to provide a certain amount of community benefit such as participating in state Medicaid programs or operating emergency
departments; or 3) imposing taxes on existing and future specialty
hospitals that do not provide some level of community benefit.
H. Are State Certificate of Need Laws the Solution?
Numerous efforts to control health care costs have been made
through the years, and these measures take a variety of shapes and
forms.150 One early attempt at health care cost control is the advent
of CON laws. CON laws require approval from a state agency
before adding hospital services.151 They have focused primarily on
controlling growth in hospital capacity.152
States began passing CON laws during the 1970s.153 Congress
later provided federal funding to all states that implemented CON
laws.154 After Congress removed the requirement in 1986, CON
laws were stricken in several states.155 As of 2002, CON laws still
existed in some form in thirty-seven states.156 Whether CON laws
have resulted in any cost savings is open for debate,157 but we continue to struggle with some of the core problems CON laws attempted to address.158
Our health care system has rarely introduced true competition
among hospitals. This is because restrictions such as CON laws pre150
See generally STATE HEALTH CARE COST CONTAINMENT IDEAS (Jul. 2003), http://www.ncsl.
org/programs/health/healthcostsrpt.pdf (provides a wide assortment of past state cost
containment proposals) (last visited Feb. 28, 2006).
151
GAO SPECIALTY HOSPITALS: GEOGRAPHIC LOCATION, supra note 12, at 15.
152
See id.
153
See id.
154
See generally National Health Planning and Resources Act of 1974, Pub. L. No. 93-641, 88
Stat. 2225 (1975) (The primary goals of the original legislation were to restrict the rapid
expansion of health care costs and to more effectively distribute health care resources.).
155
GAO SPECIALTY HOSPITALS: GEOGRAPHIC LOCATION, supra note 12, at 15.
156
Id.
157
See id.
158
See Al Baker, Panel Urges Closing of Some State Hospitals, N.Y. TIMES, Nov. 19, 2004, at B5.
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vented competition in many hospital markets.159 CON laws focused
on reducing the supply of hospital services available in order to reduce costs.160 Some of the effects of CON laws are discussed below.
By most accounts, CON laws remain very controversial.161 The
idea of limiting competition is contrary to our society’s general belief in free market ideals. Most critics point out the fact that CON
laws rarely achieved their purported cost savings goals.162 Many
also point to situations in some states where CON laws were not
managed effectively.163
Regardless of the past successes or failures of CON laws, states
that implement them have not encountered the rapid growth of specialty hospitals expected.164 Over 80% of existing specialty hospitals
are located in states without some form of CON laws.165
CON laws could provide the broadest and most restrictive
measure to prevent the future spread of specialty hospitals. As
mentioned, states without CON laws have accounted for the largest
number of specialty hospitals.166 CON laws can provide an effective
method to determine if a proposed specialty hospital will provide a
net benefit to a health care market. CON laws allow for each decision to be studied thoroughly before specialty hospitals are allowed
to operate.167 The possible effects a specialty hospital may have on a
health care market may not be completely understood without taking significant time and resources to analyze what effect the CON
laws may have on a specialty hospital.
States generally place control of the CON process with the
state agency that also oversees health facility licensing.168 Most
159
See Patrick John McGinley, Beyond Health Care Reform: Reconsidering Certificate of Need Laws
in a “Managed Competition” System, 23 FLA. ST. U. L. REV. 141, 167 (1995) (certificate of need
laws in Florida should be relaxed or efforts to implement a managed competition model
will be unsuccessful).
160
See id. at 143.
161
See id.
162
See id. at 157.
163
Jim Summers & Michael Nowicki, Due Diligence and Leadership: Healthcare Managers with
Some Gray in Their Hair May Recall a Time When No One in Healthcare Had Heard of Due
Diligence, HEALTHCARE FIN. MGMT., June 1, 2004. Former Louisiana Governor Edwin Edwards admitted that CON approvals had taken place in exchange for political favors when
Louisiana had CON laws. Id. Edwin Edwards was later convicted on unrelated corruption
charges and is currently in federal prison. Id.
164
See GAO SPECIALTY HOSPITALS: GEOGRAPHIC LOCATION, supra note 12, at 15.
165
Id.
166
Id.
167
A more detailed account of how CON laws operate is described below.
168
See, e.g., FLA. STAT. ANN. § 20.42(3) (West 2004).
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states with CON laws generally require approval prior to expanding
existing health care services or health care facilities.169 CON laws
may be defined as “a written statement issued by the agency evidencing community need for a new, converted, expanded, or otherwise significantly modified health care facility, health service, or
hospice.”170 A health care facility may include, “a hospital, longterm care hospital, skilled nursing facility, hospice, or intermediate
care facility for the developmentally disabled.”171 The scope of included services and facilities subject to the CON process varies
greatly from state to state.172
To receive a CON, an application must be made with the respective state agency that reviews the application for specific criteria.173 The criteria generally evaluate how the existing health care
facilities and services serve the existing populations.174 Generally, a
public hearing may also be held to receive input from the local community.175 After reviewing the application, the agency will either
recommend granting the CON or not granting it.176 If the applying
party is denied the application, an administrative hearing and judicial review may be available.177
Congress originally intended to limit increasing costs of health
care, reduce superfluous health care services, and provide for equitable distribution of reasonably-priced quality care.178 Preventing
new competition from entering the health care market has been one
of the greatest criticisms of CON laws. CON laws, by creating barriers to hospital market entry179, may restrict potentially beneficial
competition. This may explain why specialty hospitals have been
more concentrated in states without CON laws.180 It is possible that
169
See id.
170
FLA. STAT. ANN. § 408.032(3) (West 2004).
171
Id. § 408.032(8).
172
See e.g. MISS. CODE ANN. § 41-7-191 (West 2004) (Certificate of need is required prior to
new construction, relocation of health care facility, increases in the number of beds, major
equipment purchases, and the introduction specific health care services including: open
heart services, cardiac catheterization, psychiatric services, chemical dependency services,
radiation therapy, diagnostic imaging, home health services, etc.).
173
E.g., FLA. STAT. ANN. §408.035 (West 2004).
174
See, e.g., id.
175
E.g., FLA. STAT. ANN. § 408.039(3)(b) (West 2004).
176
FLA. STAT. ANN. § 408.039(4)(b) (West 2004).
177
See, e.g., FLA. STAT. ANN. § 408.39(5)-(6) (West 2004).
178
See McGinley, supra note 159, at 148.
179
Id.
180
See GAO SPECIALTY HOSPITALS: GEOGRAPHIC LOCATION, supra note 12, at 15.
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specialty hospitals would be able to enter health care markets with
CON laws, but the barriers to entry may be too great to overcome.
Many of the initial reasons for establishing CON laws no
longer exist.181 Originally, CON laws existed to reduce the market
supply of hospital services.182 CON laws were brought about to prevent increases in the number of beds in a given health care market
without a specific identified need for the increase in bed capacity.183
In the current reimbursement environment, hospitals no longer
have the same incentive to keep patients for longer stays to cover
their fixed costs.184
Although CON laws have had arguably little or no effect on
reducing health care costs,185 CON laws can still serve a valid purpose. The legislation that placed the moratorium on specialty hospitals provided for studies to be conducted to determine the potential
harm specialty hospitals have on community hospitals.186 CON
laws may allow for a less restrictive solution than a total ban on all
physician-owned specialty hospitals. This is because CON laws can
be tailored to allow proposed physician-owned specialty hospitals
in specific situations. For example, most of the criticisms of specialty hospitals focus on their lack of emergency services, lack of
participation in Medicaid and harm to community hospitals.187 Beyond these general requirements, CON laws could focus on other
aspects of specialty hospitals. Some states’ CON laws require a proposed hospital to provide these type of services before a CON will
be granted.188 For example, Florida allows expedited CON review
in a number of circumstances.189 Some of the requirements necessary for a hospital providing open heart cardiac services to receive a
CON exemption include:
The applicant’s payor mix at a minimum reflects the community average of Medicaid, charity care, and self-pay patients or the
applicant must certify that it will provide a minimum of 5% of
181
See McGinley, supra note 159, at 148.
182
See id. at 145–47.
183
Id. at 146.
184
Id. at 171. Diagnosis Related Group reimbursement does not pay hospitals based on their
actual costs or length of stay. Id. DRGs pay a fixed amount and thereby give hospitals the
incentive to reduce length of stay and actual costs. Id.
185
See id. at 157.
186
Medicare Prescription Drug, Improvement, and Modernization Act of 2003, supra note 22.
187
See GAO SPECIALTY HOSPITALS: GEOGRAPHIC LOCATION, supra note 12, at 4.
188
See, e.g., FLA. STAT. ANN. § 408.036 (West 2005).
189
See id.
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Medicaid, charity care, and self-pay to open heart surgery
patients.190
Even though physician-owned hospitals are much more prevalent in states without CON laws,191 implementing new CON laws
may prove difficult. This is because new CON laws would do nothing to address specialty hospitals that are already operating. Furthermore, many states removed CON laws because of their
perceived lack of effectiveness at controlling costs.192 In general,
placing stringent requirements on all hospitals as a condition of operation may not always be the most efficient way to regulate hospital competition.
I. Requiring Hospitals to Provide Community Benefits
Requiring hospitals to provide some amount of charity care or
community benefits may be another viable approach. As mentioned above, these requirements can be imposed through a CON
process. Outside of CON requirements, community benefit requirements already exist for not-for-profit hospitals.193 As mentioned
above, this requirement is necessary for not-for-profit hospitals to
justify their exemption from federal income taxes and local property
taxes.194 Community benefits could be based on similar requirements by state and federal law. Community benefits may include
providing emergency services, treating Medicaid and Medicare patients, providing charity care, etc.195 One of the benefits of a community benefit requirement is that it could address many of the
complaints about specialty hospitals.196 Also, a community benefit
requirement could address both existing hospitals and future
planned hospitals as well by imposing an ongoing requirement instead of a front-end licensing requirement
One of the problems associated with a community benefit requirement for all hospitals is that it would impose costs on existing
for-profit hospitals without providing an additional accompanying
tax exemption. Not-for-profit hospitals are already required to pro190
Id.
191
See GAO SPECIALTY HOSPITALS: GEOGRAPHIC LOCATION, supra note 12, at 15.
192
Id.
193
See generally Rev. Rul. 69-545 (community benefits may include services such as operating
an emergency room open for all persons regardless of their ability to pay).
194
Id.
195
See Rev. Rul. 56-185; Rev. Rul. 69-545.
196
See generally GAO SPECIALTY HOSPITALS: GEOGRAPHIC LOCATION, supra note 12, at 3.
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vide community benefits to justify their federal tax exempt status.197
In contrast, community benefits are generally not required of forprofit hospitals because they are required to pay federal income tax
on their profits and also local or state taxes.198 Imposing a community benefit standard on all hospitals would probably be an overly
broad solution, but it also may serve to address a broader health
care goal than merely addressing physician-owned specialty
hospitals.
Some states have imposed more specific community benefit requirements on not-for-profit hospitals.199 For example, Texas requires not-for-profit hospitals to provide 5% charity care in
proportion to their other revenues.200 One solution would be to require a lesser community benefit requirements of hospitals that did
not maintain not-for-profit status. Trying to determine quantifiable
community benefits also may present problems. Controversy often
has surrounded exactly how to quantify some of the community
benefits provided by not-for-profit hospitals.201
Some states without CON laws already require licensed hospitals to have some type of emergency room to maintain a hospital
license.202 The effect of the emergency room requirement alone,
however, may not be as significant as some have suggested. The
emergency room requirement already exists in some states and has
had little effect on the number of specialty hospitals within their
borders.203
197
See Rev. Rul. 69-545.
198
See id. (Community benefit requirements are not imposed on for profit hospitals by the
federal government.)
199
See id.
200
TEX. HEALTH & SAFETY CODE ANN. § 311.045 (Vernon 2004); see also Kevin M. Wood, Comment, Legislatively-Mandated Charity Care for Nonprofit Hospitals: Does Government Intervention Make any Difference?, 20 REV. OF LITIG. 709, 725 (2001).
201
See generally Wood, infra note 200; James B Simpson & Sarah Strum, How Good Samaritan?
Federal Income Tax Exempts for Charitable Hospitals Reconsidered, 14 U. PUGET SOUND L. REV.
(1991).
202
TEX. HEALTH & SAFETY CODE ANN. § 241.026(f) (Vernon 2004).
203
See, e.g., GAO SPECIALTY HOSPITALS: GEOGRAPHIC LOCATION, supra note 12, at 20 (“Texas
. . . with 20 specialty hospitals, had almost twice many specialty hospitals as the state with
the second highest number.”). Texas imposes an emergency room requirement for hospitals to obtain an operating license. TEX. HEALTH & SAFETY CODE ANN. § 311.046 (Vernon
2001).
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J. Imposing Taxes on Specialty Hospital Services
New state or local taxes may also provide a solution to address
some of the perceived problems with specialty hospitals. On the
surface, a tax may sound like exactly the wrong idea, considering
the already significant burden health care costs are on businesses
and taxpayers.204 A tax on hospital services is perhaps an unpopular political alternative, but in the correct situation, a tax could provide significant benefits. Some of these benefits may include the
ability of local or state tax revenue received to be eligible to draw
down matching federal funds through the state’s Medicaid program.205 This additional revenue could be used to reduce the effects
of revenue losses at non-specialty hospitals.
A new tax could be targeted in the sense that it could impose a
penalty on facilities that do not provide community benefits such as
emergency services, treating Medicaid patients, or similar criteria.
The amount of the tax could be applied on a staged basis depending
on the degree of community benefit or desirable service that is performed. The resulting revenue could be used to help defray some of
the costs these services have on other hospitals.
The real benefit of a tax as compared with fixed community
benefit requirements is that it would allow the market to determine
what services are needed, and it would not force specialty hospitals
to provide services that they could not provide efficiently. A tax
could even be used in the place of CON requirements.
The greatest challenge presented by establishing a tax is to ensure it is established to account properly for differences in the costs
of providing community benefits. This process could become extremely cumbersome and would be less likely to work on a statewide basis. The effect of a tax at a local level would be more likely
to produce the desired results. Local hospital districts could impose
the tax on area hospitals instead of using their traditional taxing
methods such as property taxes.
It can be argued that the existing deficiencies in payment between government and private commercial payors are, in effect, a
tax. If hospitals are using private commercial payors to cross-subsidize services provided by government payors,206 then an effective
204
See KOHN
205
CTRS. FOR MEDICARE & MEDICAID SERVS., WELCOME TO MEDICAID 18.2.3(E) (2005), http://
www.cms.hhs.gov/medicaid/ (last visited Feb. 28, 2006) (Medicaid is funded by both
state and federal governments.).
206
See generally DEVERS
ET AL.,
supra note 4.
ET AL.,
supra note 13.
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tax already exists. The ability of government payors to pay below
the market rate to hospitals demonstrates the power of the federal
government as a purchaser of hospital services. Non-specialty hospitals cannot operate without some reliance on government reimbursement.207 Although specialty hospitals appear to rely on
Medicare revenue,208 they are a demonstration of how market forces
will adapt to inefficiencies. Specialty hospitals are merely exploiting this existing gap in reimbursement between government and
private payors simply because they can.
K. Going Forward
The challenges presented by specialty hospitals are complex
and require significant resources to determine what actions would
best address some of the problems. If specialty hospitals continue to
spread, it is likely that they will ultimately cause non-specialty hospitals some harm. The harm to non-specialty hospitals, however, is
likely to be more severe if policy makers do not take any remedial
measures. Unfortunately, catastrophic results may occur if some of
the problems that allow specialty hospitals to flourish are not addressed in the near future.209 But catastrophic results may be the
necessary impetus to push through drastic changes to the way we
regulate hospital competition and the health care market.
No easy answers are available to fix some of the problems
raised by specialty hospitals. After studying the specialty hospital
issue, MedPAC recently called for Congress to extend the recent
moratorium for another eighteen months to further study the issue.210 The challenge for policymakers going forward is to try to
balance the government’s role as a regulator and primary financer
of health care services with the private market. As the problems
with specialty hospitals illustrate, many of the existing policies need
to be rethought. Unfortunately, there are no simple solutions to
these problems.
The author suggests that a complete ban on physician investment in specialty hospitals is likely too harsh of a solution. But
some restriction on physician ownership in specialty hospitals is
207
See JOHNSON & ZAHRADNIK, supra note 130.
208
GAO SPECIALTY HOSPITALS: GEOGRAPHIC LOCATION, supra note 12, at 10.
209
See generally, GAO UNSUSTAINABLE
210
See Nora Liggett, MedPAC Recommends Extending Stark Moratorium on Specialty Hospitals,
HEALTHLEADERS NEWS, Jan. 26, 2005, http://www.healthleadersmedia.com/view_feature.
cfm?content_id=63045 (last visited Feb. 28, 2006).
TRENDS,
supra note 1.
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necessary to prevent over-utilization of hospital services. It remains
to be proven whether specialty hospitals truly operate more efficiently than their competitors. Unless specialty hospitals truly provide no benefits, banning all physician investment is not the correct
solution. A balance needs to be achieved to promote possible efficiency gains, but discourage over-utilization of specialty hospital
services by limiting physician investment to some degree. Finding a
balance will be a difficult process, but stifling efficiency gains may
have even greater repercussions.
Beyond self-referral legislation, measures such as CON laws
are necessary to ensure fair hospital market competition. This is
due largely to requirements imposed on some hospital operations
such as providing emergency services and the resulting disparity in
hospital revenue from government and commercial payors. In the
absence of adequate government reimbursement to hospitals that
provide community benefits, measures must exist to force new market participants to shoulder some of these cost burdens. The most
effective means of accomplishing this measure is through some
form of CON laws. However, to combat some of the differences
between specialty and non-specialty hospitals, CON laws need to
focus less on the initial granting of the hospital licenses and more on
ongoing hospital operations. Changing the focus of CON laws may
allow for less initial out-of-pocket start-up costs for new hospitals
and ensure new hospitals are not allowed an unfair advantage in a
hospital market. A shift of the burden from ex ante to ex post license
also may allow for a more substantial review. This is because hospitals will be under a continuing requirement to comply with any imposed requirements such as providing emergency services or
treating Medicaid patients, not just a regulatory hurdle to overcome
before receiving a hospital license. As mentioned, ensuring ongoing
operations provide some level of community benefits may be best
enforced by a penalty tax.
IV.
CONCLUSION
Although specialty hospitals present unique problems in how
to better manage hospital competition, no single solution solves all
of the problems presented by specialty hospitals. Self-referral laws
may offer a temporary solution, but an outright ban on physician
investment in specialty hospitals is an unwarranted, harsh solution.
Further, a complete ban on future investment does little to address
existing physician-owned hospitals.
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CON laws present an effective framework to evaluate how
specialty hospitals will compete in a hospital market. Current CON
laws require studies of individual proposed hospitals prior to granting the hospital a license to operate. In lieu of a front-end evaluation, processes that ensure hospitals continue to compete fairly in
their marketplace provide a better solution. This can be accomplished by additional community benefit standards in the form of
requiring certain activities to be performed or by taxes.
In the end, no single solution provides the ultimate answer on
how to fairly regulate hospital markets. The best approach allows
for flexibility to suit individual hospital markets and encourages
hospitals to provide healthy competition.
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